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Mining Patent Gold: What Every CEO Should Know

In the weeks since Google acquired Motorola Mobility and its 17,000 patents for $12.5 billion, the media has engaged in an orgy of hand-wringing over a supposedly broken patent system that diverts resources away from innovation and towards litigation instead.

Ignore the histrionics. What the Google-Motorola deal actually proves is that innovation—and its embodiment in intellectual property—is more valuable and necessary than ever for market success. What’s more, patents are no longer simply akin to mining claims that give one the exclusive right to pan for gold. In many cases, patents are the gold itself.

But first, let’s debunk some myths about our supposedly broken patent system. The truth is that the number of patent infringement suits each year has held steady for seven years at just under 3,000. Ninety percent of those suits are abandoned or settled, and of the 300 that remain, two thirds never go to trial but are adjudicated on pretrial motion.

That leaves about 100 patent infringement trials per year, the same number as went to trial a decade ago. That is pretty modest for a nation with 2 million active patents and hundreds of thousands of companies competing against one another. “It’s not excessive at all,” says Paul Michel, retired chief judge of the U.S. Court of Appeals for the Federal Circuit, which handles patent appeals. “Not in a technology economy.”

To be sure, we are plagued by a new species of patent litigant these days, the so-called patent troll, who buys up questionable patents in hopes of extracting payments from deep-pocketed companies eager to avoid the expense of litigation. But a free and open legal system like ours is bound to be subject to a certain number of abusive holdup suits, and not just by patent trolls, but also by product liability trolls, medical malpractice trolls, and shareholder fraud trolls as well. Just watch the ads on late-night TV and you’ll see that the lure of making a quick buck by suing someone—anyone!—is, unfortunately, as American as Apple pie. That’s a price we pay for allowing everyone unfettered access to the courts. And anyhow, a large percentage of Motorola’s patents, perhaps even a preponderance, are enmeshed in a worldwide web of licenses, cross-licenses, patent pools, and standards activities that tend to undermine any offensive or defensive value they could offer in litigation.

No, Google bought a great deal more than patents when it acquired Motorola, though there are doubtless some real gems in the portfolio. As a relative newcomer to the wireless arena, the search giant in one bold move got its hands on the unmatched innovation experience of the longest-lived mobile phone company on earth. The technical acumen and product experience of Motorola’s thousands of mobile software and hardware engineers will prove hugely valuable to Google as it seeks to dominate the $250 billion global market in smartphones, especially if it decides to become a handset maker, as Motorola had been.

From this viewpoint, the Google-Motorola deal offers important lessons for CEOs.

First, make sure your intellectual property strategy serves your business strategy. You’d be surprised how many once-great companies simply churn out patents on automatic, without regard for where the business needs to innovate and grow. Also, be ready for market conditions to change very quickly. Just remember how yesterday’s leader in cell phones, Nokia, became today’s laggard in smartphones, and how in only two years netbooks went from the next big thing to who cares?

Second, build or buy the innovation and the supporting intellectual property that you’ll need to succeed. Secure patents in emerging new markets before your competitors get there—we call this “forward invention”—and you’ll have placeholders for the products and brands you will create. Start with your end goal in mind and set up rigorous patent processes that can ensure a place for your company in the most vital innovation arenas of tomorrow. Google could have spent years developing the internal capabilities needed to dominate tomorrow’s smartphone field—years that Apple was unlikely to give it. Instead, in one fell swoop it gained many thousands of man years of experience and put itself on a more equal footing with Apple.

Marshall Phelps.

Third, mine the gold within. Hundreds of mature companies have built strong portfolios of thousands of patents. Some of them license parts of their portfolios to other, usually non-competing businesses, for millions of dollars in annual revenue. But a great many of them sit on a trove of unused patents that gather dust in their legal departments’ filing cabinets like Rembrandts in grandma’s attic.

In some cases, the patents may even be worth more than the operating company itself. Kodak is one example; there are certainly others. Or a patent portfolio could provide the financial or strategic life raft that enables an old-line company to survive and move into new and more successful lines of business.

John Cronin.

Trust us, we know. Twenty years ago, when IBM faced bankruptcy, we turned Big Blue’s patent portfolio into a $2 billion a year revenue stream that helped the venerable firm survive and eventually prosper again, creating patent processes used in many industries today.

Marshall Phelps built and led the intellectual property operations at IBM and Microsoft. John Cronin was IBM’s top inventor and ran its Patent Factory; he is today chairman and managing director of the ipCapital Group, an intellectual property consulting firm.

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